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Pakistan is prematurely transitioning from agriculture to services economy by skipping a strong manufacturing base. With world’s fifth-largest population, such model is simply not sustainable. Government policies, especially, in the last two tenures, were implicitly against industrialization. Taxes and regulations were higher for manufacturing; while the retailing and trading business were much easier to start and manage.

There is a dire need to have the government focus on promoting industrialization. If there was any support to industrialization, it was in the power sector. The guaranteed high returns in dollar terms for power sector swayed the industrialists in the country to invest in the energy sector. That came at the cost of not investing in their respective strengths. Today, the power capacity is there; but not many industries are there to consume it.

Then, the government and central bank incentives were there to pick winners. For instance, textile is supported by all governments as it generates foreign exchange. There are automobile policies to protect local manufacturers from imports. The last big industrial investment (apart from power) in Pakistan was in the fertilizer sector. Again, there was government support on getting cheap inputs and providing protection from imports.

The industrial policy in Pakistan has largely remained vertical where the incentive structures were favoring certain industries in order to channelizing investment. Economists argue that better industrial policy is horizontal where policy framework assumes a direction and market forces are allowed to pick winners. The main policy objective should be to spur innovation for entrepreneurs to find competitive edge by the process of ‘self-discovery’ (Hausmann and Rodrik, 2004) so that in due course they become comparative advantage of the economy.

The macro level focus of this regime is rightly on the revival of industrialization – but it is imperative to not repeat mistakes of the past. The Commerce Ministry is thinking about having a textile policy – this is not a good idea. Why pick a winner? This may lead the other manufacturers to invest in textile, leaving other industries high and dry.

One good scheme to talk about is SBP’s TERF (temporary economic refinance facility). The central bank came with this facility in response to COVID-19. This one-year scheme is expiring in March 2021. The scheme provides concessionary long-term (tenor is 10 years including grace period of 2 years) refinance to set up new industrial units or to expand existing ones. When this facility was launched, it was only for greenfield projects; later after consultation with industrialists, expansion of existing projects was incorporated.

This scheme is making its mark. SBP provides refinancing to banks at 1 percent and banks can charge risk premium up to 4 percent to grant loans at a maximum price of 5 percent. To date, Rs300 billion worth of loans have been approved for 363 projects. Another Rs323 billion loans are requested for 225 projects. This refinancing is for purchasing new imported and locally-manufactured plant and machinery.

TERF can help expand manufacturing base in Pakistan. The risk to lend is borne by banks. The decision to select sector is of private sector. SBP is merely providing concessionary financing. The loan is specifically for plants and machinery. The rule of thumb is that an equivalent amount is to be invested in building other infrastructure and human resource. Thus, this Rs300 billion TERF in disbursement may generate another Rs300 billion in the paraphernalia. One can safely say that total investment commitment is of around Rs600 billion.

SBP Deputy Governor Sima Kamil has said in a TV interview that 40 percent of the investment is in textile, followed by building materials and many other industries. Some 25 percent of the projects are greenfield. The scheme is expiring in 12 weeks. She also said that another Rs100 billion could be processed by banks by March end.

This will go a long way in developing manufacturing base in the country. The government has to provide other horizontal incentives for the industrial expansion including special economic zones, affordable and reliable energy across the industry, cascading imports tariff structure, expansion in port infrastructure, human and skill development, to name a few.

A recent incentive of providing incremental electricity consumption for SME and large-scale manufacturers at half and three fourth of existing rates repetitively is commendable. The imports tariff rationalization is happening, too. The need is to work on other factors to reduce the cost of doing business.

The government should not delve into the debate of import substitution or export promotion. The focus needs to be on broad-based incentives. Let the private sector select where to invest. Let the private sector find out new exports avenues and import substitution sectors. The government needs to think on freeing up huge concessionary long-term credit given to exporters (mainly textile) in the form of LTFF (long-term financing facility), and this credit should be extended on lines similar to those for TERF.

Copyright Business Recorder, 2021

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Ali Khizar

Ali Khizar is the head of research at Business Recorder,